Opinion: SEC Whistleblower Program Invites Abuse
October 14, 2021
As seen on The DI Wire
On September 15, the U.S. Securities and Exchange Commission (SEC) announced that it paid a $110 million award to an informant through its whistleblower program, an amount second only to the $114 million award issued in October 2020. Over the past decade, over $1 billion has been awarded to whistleblowers–a considerable amount for a new program that was considered a kickback and a conflict of interest only a few short years ago.
The SEC whistleblower program went into effect in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Established as a response to the 2008 financial crisis, former President Barack Obama called it “a sweeping overhaul of the financial regulatory system.” According to the SEC, the program’s goal is to incentivize individuals to come forward with original information leading to a successful enforcement action worth $1 million or more. Today, if an enforcement is levied, the whistleblower may be entitled to a reward of between 10 and 30 percent of monetary sanctions collected.
The Dodd-Frank Act provides two important pieces of protection for whistleblowers that other kickback (i.e., incentivization) programs may not offer: protections against retaliation and, perhaps most importantly, anonymity. So, if a whistleblower provides a tip and the SEC decides not to follow up, what happens? Nothing. If the SEC does follow up but somehow finds that no violation took place, what happens to the whistleblower? Nothing. Conversely, is the reported company permitted to take action against the whistleblower? No. This essentially enables any person to come forward and make a claim against their employer and offers them and their lawyers the potential to take home a monetary award in the millions without any repercussions.
Perhaps this is why one of the first whistleblowers was Karen Kaiser, the woman who provided information against Pequot Capital and the ex-wife of a Pequot Capital employee.
The idea of jilted lovers and industry competitors as whistleblowers might be appalling; however, the most hypocritical part of the whistleblower program is that just a few years before it was initiated, the SEC referred to such payoffs as “kickbacks.” This was popularly displayed in the case against the Milberg Weiss law firm, which was indicted for paying the lead plaintiffs in a series of securities class action cases. This payment was considered a conflict of interest and two of the law firm’s partners went to jail. How does the whistleblower program not put the SEC in the same position as Milberg Weiss?
Additionally, SEC investigations are considered civil, not criminal, and the differences are considerable. For one, the standard of proof is very different. In a criminal trial, crimes must be proved “beyond a reasonable doubt”, but in a civil case, crimes may be proved by “the preponderance of evidence,” which basically states that it is more likely than not that an infraction occurred. In a civil case, a defendant is said to be liable, as opposed to guilty.
Again, this points back to the issues with the whistleblower program. Anyone can report a claim to the SEC, allowing the SEC to bring charges forward. And because these matters are civil only, and the burden of proof is much lower, many companies choose to settle out of court, due to the time and resources required to fight back against the limitless coffers of the SEC. And although, a company may not technically be considered “guilty,” the hit to their reputation and an out-of-court settlement often leaves them guilty in the court of public opinion.
As noted in my previous article, we do need a system in place to protect investors, and I believe the idea of a whistleblower program is sound. After all, it was whistleblower Harry Markopolos who alerted the SEC to Bernie Madoff’s Ponzi scheme. The current hypocritical iteration of the program means that any disgruntled employee or angry relative can potentially report a company for wrongdoing.
Furthermore, given the amount of complicated and overreaching regulations each member of the financial industry must adhere to, it is entirely likely that the SEC will find something once it starts digging. If not, the company is still left with the aftermath of lost time, resources, and the hit to its reputation, while the whistleblower and the SEC walk away. This program is no program at all. It is essentially a lottery but with better odds for the whistleblower.
Does this mean that we can expect each whistleblower to come forward based on their sense of justice and moral responsibility? That would be nice, but perhaps, not practical. Some type of incentivization may help embolden certain people who are aware of wrongdoings. Should a cap be in place limiting the amount that a whistleblower can receive? Or is there another type of incentive that may work for whistleblowers? Could the whistleblowers go through an impartial third party?
Regardless, it is obvious that we must find a new solution that protects both investors and businesses because, in the end, the group that profits the most under the current program is the SEC.
Have you been affected by the whistleblower program? Do you have an alternative solution? Please post your blog comment or write to me at Publius.Connect@gmail.com. And thank you to everyone who contacted me in regard to the previous article. Your voice has not gone unheard. Together, we can reform our industry in a manner that is safe and equitable for all involved.
